WTO panel rejects India's arguments

A World Trade Organization (WTO) panel has concluded that India is maintaining prohibited export subsidies that must be withdrawn in the coming months. Our government might appeal. 

The United States had alleged India gives prohibited subsidies through the Export Oriented Units (EOU) Scheme and via sector-specific schemes, examples being the Electronics Hardware Technology Parks (EHTP) Scheme, Bio-Technology Parks (BTP) Scheme, Merchandise Exports from India Scheme (MEIS), Export Promotion Capital Goods (EPCG) Scheme, Special Economic Zones (SEZ) Scheme and Duty Free Imports For Exporters Scheme (DFIS) that refer to nine entries in exemption notification 50/2017-Cus dated June 30, 2017. 

The Government of India argued in vain that the support extended through these schemes was not of prohibited subsidies. And, also failed to get eight years to phase these out. Ingeniously, India claimed capital goods are inputs that get consumed in the process of manufacture of export products. Not surprisingly, the panel dismissed that. The contentions that EOU and SEZ are special schemes to boost employment oriented manufacturing and not promote export gained no traction. On some relatively insignificant issues, the US allegations were also rejected.   

The panel adopted a three-step methodology. One, to identify the tax treatment that allegedly constitutes a financial contribution and the objectives behind it, then identifying the benchmark for comparison i.e the fiscal situation which it is legitimate to compare with and comparison of the applicable treatment with the benchmark. Every scheme was evaluated with this methodology before arriving at the conclusions.  The panel has asked India to withdraw the prohibited subsidies under the EOU/ EHTP/BTP Schemes, EPCG Scheme, and MEIS within 120 days, the prohibited subsidies through five entries under DFIS within 90 days and the income tax and other benefits under the SEZ scheme within 180 days. 

Exporters can rest assured that there is no threat to the Advance Authorisation Scheme, Duty Drawback Scheme and four specified entries under DFIS. Also import of inputs required for export production under the EOU and SEZ schemes may continue. However, going by the reasoning adopted, whether the proposed Refund of Duties and Taxes on Exports Products scheme will survive sharp scrutiny is a matter of doubt, unless the rate calculations are very precise. 

The commerce ministry must go back to the drawing board, re-evaluate its policies, engage in intense consultation with stakeholders and come up with workable and sustainable strategies to promote exports in a way that is compatible with the disciplines under various WTO agreements. It has to look for massive simplification. For example, doing away with monitoring the realisation of export proceeds against each shipment, eliminating any role for regional offices of the Directorate General of Foreign Trade in issuing advance authorisations or monitoring fulfilment of export obligations and so on. 

A careful study of protectionist measures and rather liberal use of non-tariff barriers and anti-dumping or safeguard measures, especially on primary products, and how they affect the downstream user industries is necessary. Whether the policy of maintaining high customs duty rates, along with a plethora of exemptions, should give way to a lower import duty regime with fewer exemptions is also worth consideration. 

Exporters should also focus more on improving the competitiveness. And, on reducing the dependence on tax incentives that mostly get passed on to foreign buyers through lower prices.

E-mail: tncrajagopalan@gmail.com